Legacy Planning for Self-Directed IRA Owners and Their Beneficiaries

Most people who are at or near retirement start thinking about how they would like to see their savings and assets passed on. Legacy planning is the process of expressing how those things will be transferred to the next generation. The preparation includes deciding how to handle the transfer of your Self-Directed IRA to your beneficiary or beneficiaries and thinking about timing and taxation, which will be critical parts of the process.

The balances in Self-Directed IRAs have been generally higher, partially because of the alternative assets, including real estate, which can generate both an income stream and capital appreciation. These accumulations make it all the more essential that you know your options and make your plans accordingly. Here some things to consider:

Make sure your beneficiary information is accurate and up to date

Whenever you open a Self-Directed IRA, you designate a beneficiary or multiple beneficiaries to inherit the funds in your account. You can name individuals or entities, such as churches, charities, or organizations, as your beneficiary.

You will use a beneficiary designation form when you open the account, but it’s essential that you regularly check to make sure the information on the form is up to date. Otherwise, your money may end up elsewhere from what you intended.

Your current information for each beneficiary should include:

  • Full address, phone number, and email address
  • Date of birth
  • Social Security number or Tax I.D. for entities
  • Relationship to the IRA account holder

If you have more than one beneficiary, you must decide how you want the money divided

If you have chosen to have multiple beneficiaries for your account, you also have to define how the funds will be divided. For instance, if you have three beneficiaries, you could share the assets equally, with each one getting one-third. But you could also give half to one and one-quarter to each of the other two.

The most common beneficiary designation form, called the “per capita” design, indicates that if any primary beneficiary dies before you, that portion of the account is to be divided between the other remaining primary beneficiaries.  If there are no other primary beneficiaries, the deceased beneficiary’s share will be given to a successor beneficiary, if one has been named or appointed in the plan document by default.

The death of a beneficiary—along with divorce, births, adoption, or a new marriage—could affect your beneficiary instructions. That’s why it’s so important for you to review your designation form regularly. You might even consider obtaining help from a tax or legal professional whenever you initiate or change your beneficiary designation form.

Your beneficiaries will have distribution options

The IRS code allows your beneficiaries three options for receiving their distributions:

  • The five-year rule
  • Life expectancy payments
  • Special rule for spouses

It’s worth noting that the choice that each beneficiary makes is irrevocable. That means even if the inherited account is transferred from one custodian to another, the distribution election remains unchanged.

Here are the details on each option:

  1. The Five-Year Rule

You could use this option if the Self-Directed IRA account holder did not start taking required minimum distributions (RMD) before they died. That means the date of death must have been before April 1st of the year following the time that the account holder turned 70 ½.

The beneficiary may choose to keep the assets in the account for five years. On the fifth anniversary of the Self-Directed IRA account holder’s death, the recipient must take the entire account as a taxable distribution. If any funds remain in the inherited account, they will incur a 50% “excess accumulation” penalty.

  1. Life Expectancy Payments

Using a standardized life expectancy table to determine how much must be distributed annually, your beneficiaries may withdraw all of the funds in the inherited account over time. The first life expectancy payment must be taken at the end of the year following the death of the Self-Directed IRA holder.

A special rule applies if the deceased account had already started taking RMDs and the beneficiary is older than the account holder. If this is the case, beneficiaries may use the deceased’s single life expectancy instead of their own age to calculate the life expectancy distribution.

Just the same as with the five-year rule, if a life expectancy payment is not distributed, that amount will be subjected to a 50% excessive accumulation penalty.

  1. Special Rule for Spouses

Spouses who are beneficiaries may choose to keep the assets in the original account, which will be renamed an “inherited account,” or to transfer the assets to their own Self-Directed IRA.

It’s good to communicate with your beneficiaries as you start legacy planning. That way you can let them know what their options will be so they can make informed decisions.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Keep an Eye out for These Possible Changes to Self-Directed IRAs

Potential tax law changes might be arriving in 2019.  This could affect individuals who have Self-Directed IRAs.  While there has not been a major overhaul to the tax code since 1986, two U.S. Representatives have introduced—or more accurately “reintroduced” — the Retirement Enhancement and Savings Act (RESA).

The bill is intended to increase access to retirement accounts among small businesses. In its most significant provision, RESA would make it easier for them to open multiple employer plans (MEPs), along with other proposed changes that could require certain sized businesses to offer a retirement plan and alterations to the way Required Minimum Distributions (RMD) and are handled.

Some of the other provisions include allowing a terminated worker with an outstanding 401(k) loan balance to roll over the loan and pay it back without it being considered a taxable distribution and establishing a “safe harbor” for the selection of lifetime income providers for retirement plans.

Here are a few of the highlights of the bill:

Multiple Employer Plans (MEPs) may become a reality

President Trump’s executive order of August 31, 2018, along with the proposed RESA legislation, means that multi-employer plans may finally come to fruition. By spreading out the costs, liabilities, and administrative responsibility among multiple employers, smaller companies could benefit by being able to offer their workers a retirement plan that would not have been available otherwise.

Right now, the law requires that any employers who band together to offer their workers retirement plans must have a connection, such as being in the same industry. RESA would eliminate this requirement and end another provision that puts the entire plan at risk if one of the members of the plan violates the law.

Make 401(k) annuities possible and improve annuity information

Traditional pension plans usually provide an annuity option that creates a lifetime income stream for employees. Most 401(k) plan participants do not have this choice. Under RESA, however, businesses would be afforded protection from lawsuits in case an annuity provider goes out of business or fails to live up to its agreement.

Another provision of RESA would require benefit statements to include lifetime income estimates at least annually. RESA also enhances the portability of these annuities for workers who switch employers. Under the present law, participants can be charged a surrender fee when they change jobs.

Repeal the maximum age for Traditional IRA contributions

This part of the legislation would repeal the prohibition on contributions to a Traditional IRA by an individual who has reached the age of 70½. As Americans continue to live longer, they also stay employed well beyond their traditional retirement age.

Expand tax credits to offset the costs of starting a retirement plan

Businesses that are starting a new retirement plan right now may receive a $500 tax credit. RESA would increase that amount to as much as $5,000 for three years. The credit would apply to new 401(k) and SIMPLE IRA plans. Companies that add automatic enrollment would be eligible for an additional $500 credit for up to three years.  Employees would still be allowed to elect not to participate in the plan.

Changes to the required minimum distributions (RMD) rules for Self-Directed IRAs

The legislation would modify the RMD rules as they pertain to defined contribution plans and Self-Directed IRA balances upon the death of the account owner. Under the proposed changes, aggregate account balances that exceed $450,000 are required to be distributed by the end of the fifth calendar year following the year of the employee or Self-Directed IRA owner’s death.  Distributions to the following beneficiaries are not included in the rule:

  • Spouse of the deceased.
  • Disabled or chronically ill individuals.
  • Individuals who are not more than ten years younger than the deceased.
  • A child of the deceased who has not reached the age of maturity.

Stay in touch with your tax or financial advisor for updates and to determine how these potential changes will affect your situation.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Take Advantage of Raised Contribution Limits in Self-Directed IRAs in 2019

If you are saving for retirement, there is good news for you in 2019. The IRS has raised the contribution limits on some of the most popular qualified retirement plans.  This is good news for individuals who have a Self-Directed IRA. Why is that such good news? Well, the obvious reason is that you get to save more tax-advantaged money toward a comfortable retirement. Also, all those extra funds you contribute to your plan are now subjected to the magic of compound interest—interest on the interest that your account is earning.

While taxpayers are typically conditioned to view notices from the IRS with fear and trepidation, this is not the case with this announcement. Thanks in part to a rise in the inflation rate, this increase on the limits can have a dramatic effect on the size of your portfolio, especially if you are a few decades away from retirement.

Depending on the type of plan you use, there are also some immediate benefits. If you are saving into a Traditional IRA, for instance, your contributions are tax-deductible, which could mean you will have a smaller tax liability at the end of the year.

Here are the details on the plans that are affected and their revised limits:

Which plans are included in the raised limits in 2019?

  • Contributions into Traditional and Roth IRAs increased from $5,500 to $6,000 for those younger than 50
  • The catch-up contribution for 50 years and older remains at $1,000
  • Maximum workplace retirement contribution amounts—401(k), 403(b), most 457 plans, and federal Thrift Savings Plans—increased from $18,500 to $19,000 with a $6,000 catch-up for workers who are 50 and older
  • Annual employer limit for 401(k)-type plans, SEP IRAs and Solo 401(k)s increased from $55,000 to $56,000 in 2019
  • Income limits and phase-outs have changed on some plans. Visit the IRS’s Highlights of Changes for 2019 for additional information

Don’t miss out on this opportunity

If you are a young worker, do not be fooled into thinking that you have plenty of time to worry about retirement. Starting early allows you to accumulate an impressive amount of retirement funds, and once you have amassed them, you can use them to diversify into assets that give you a chance for lucrative returns.

That’s why it’s critical, no matter what age you are, to contribute the maximum to your retirement account each year and take advantage of the power of compounding.

Compound interest is your greatest ally

As mentioned earlier, compound interest is an important player in the game of investing and saving. In essence, compound interest refers to “interest on the interest,” and it can make a tremendous difference when you have been investing for several years.

Here is just one example:

Michelle is a 35-year-old software engineer who has managed to save $25,000 in her Self-Directed IRA account. She uses her funds to invest in a commercial property that returns 8% annually, and she continues to add $500 each month to her account. By the time she reaches the age of 65, she will have a portfolio that is worth $1,018,572 with monthly compounding.

Of course, these returns are not guaranteed and any changes in the variables will affect the outcome. Be aware, however, that the 8% return is not an unreasonable figure. The S&P 500, which evaluates the performance of the stocks of the 500 largest companies in the New York Stock Exchange, has grown at a 12.25% rate since its inception in 1923. In a shorter window, its average return has been 10.72% since 1992.

Add diversity and growth with alternative assets

When you choose American IRA as your Self-Directed IRA Administrator, you will not be restricted to the investment options offered by most banks and brokerage firms. With a Self-Directed IRA, you can diversify your portfolio with real estate, a partnership, tax liens, and precious metals.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.


Women and Retirement: Are You Saving Enough in your Self-Directed IRA?

A 2018 report from the retirement consulting firm, Aon, indicates that nearly three-quarters of women who expect to retire at age 67 will end up with about two-thirds the income they will need to live comfortably. In other words, retirement experts have calculated that they should have saved an amount equivalent to 11.6 times their last annual salary when, in fact, they are on track to end up with a much lower figure of 7.6 times their salary. This savings shortfall will leave women with two options: start saving more money immediately or delay retirement and continue working. This is where a Self-Directed IRA can help.

Women face different challenges than men

Women are typically at a disadvantage during their working years. First of all, they are still earning approximately 80 percent of what their male counterparts are bringing in. Add to that the breaks from working that many women take to raise children or care for elderly family members.  And with a longer life expectancy than men, women must make their savings last longer.

While working past their full retirement age–either full-time or part-time–might appeal to many women who enjoy their jobs, it still makes sense for you to save as much as possible in case working after your retirement age is not an option because of unforeseen circumstances, such as poor health.

A financial plan can be your GPS

Even though saving for retirement is critical for both men and women, the factors mentioned above add an extra element of difficulty for female workers to set aside adequate funds for their later years. These factors make it even more important that women meet with a trusted advisor to create a financial plan that will give them a road map towards a comfortable retirement. And once that plan is in place, it’s imperative to pursue those goals aggressively with a Self-Directed IRA.

Make sure your retirement funds are working as hard as you do

After your financial plan is completed, you will need an investment strategy to reach your savings goals. Workplace retirement plans are a good start, but they are typically limited in the investment choices they offer. Women who want more control of their investments are turning to Self-Directed IRAs to give them that control and to add diversity into their portfolios.

While a traditional brokerage account usually offers mutual funds and money market accounts only, Self-Directed IRAs expand those choices with alternative investments that include:

  • Real estate: both commercial and residential
  • Private lending
  • Precious metals: gold, silver, and platinum
  • Private stocks
  • Tax liens
  • Joint ventures and partnerships

Of course, you may still include investments such as common stocks, bonds, and mutual funds in your portfolio, but the alternative investments available through a Self-Directed IRA put you in the driver’s seat, allowing you to make your own investment decisions.

What difference can a higher return make?

Let’s assume you are a forty-year-old woman, and you are contributing the maximum, which is $6,000 for 2019, into an IRA. Let’s also say that you have accumulated $75,000 in your retirement account up to now. If you continue to save $6,000 each year until you retire at the age of 67, you will have accumulated approximately $630,000 if you average a conservative 5% on your savings.

Now, imagine that same woman earning 7% on her portfolio. Her account would have grown to over $970,000. And what if she could have averaged 10%? She would have retired with almost $2,000,000!

No one can guarantee that any investor will average 10% on her retirement portfolio. But keep this in mind: The S&P 500 stock index, which comprises about 500 of America’s largest publicly traded companies, has historically returned an average of 10% annually.

So, with a combination of financial assets such as stocks and real assets like commercial properties, you are allowing yourself to close or eliminate the gap between the amount you will need at retirement and what you will be able to accumulate.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Nearly Half of 55-Year-Olds Have No Private Retirement Savings in Self-Directed IRAs

When it comes to retirement savings, there really are two Americas: In one America, the average 401(k) balance is bouncing around $100,000, according to research from Fidelity Investments.

In the other America, taxpayers are heading into their retirement years with nothing in savings. Of those aged 55 years and older, nearly half – 48% – had nothing saved in any retirement account to help secure an income for them in retirement. That includes employer-sponsored retirement accounts like 401(k)s as well as individual accounts like IRAs and Roth IRAs, including Self-Directed IRAs.

That’s a modest improvement from 2013, when the figure was 52 percent – but still indicates that younger baby-boomers are woefully unprepared for their retirement years, when many of them will not be able to earn an income through work.

Part of the problem is access: 2 out of 5 workers in this age cohort who do not have savings of their own do not have access to a traditional defined benefit pension plan – in which an employer guarantees them a certain predictable monthly payment based on what they earned in their years of service with the employer – most frequently a government agency, in this day and age, as few private sector employers continue to maintain traditional defined benefit pensions.

This indicates that some of these workers will have at least some pension income to fall back on in retirement. But 29 percent of Americans age 55 and older does not have access to either an employer-sponsored defined benefit plan nor to savings of their own in a 401(k), IRA, Self-Directed IRA or other retirement account.

According to the federal General Accounting Office, the median household retirement savings of those age 65 to 74 had $148,000 saved in 2015 – the last year of data upon which the report was based. This would translate to a conservative annuity income of about $649 per month.

Meanwhile, the Average Social Security benefit in 2019 is about $1,422 per month. Which means the average senior without retirement savings or access to an employer-sponsored pension is looking at retirement income of around $2,000 per month, or $24,000 per year.

If you are behind the 8-ball, what can you do about it?

First, if you have access to an employer 401(k) with a match, contribute at least enough to maximize your employer match. If your employer is matching 25 cents of each dollar you contribute, up to 3 percent of your pay, then contribute 3 percent of your pay. The immediate return of 25% per dollar of contribution up to that threshold is solid in any investment endeavor, and is a worthy use for your next dollar of savings at any time

Second ruthlessly attack credit card debt. With average interest rates of 14.14% for existing accounts and 19.24% for new offers, and average credit card debt per household of $8,292. At the 19.24 rate, that frees up $133 per month in interest charges alone.

The same goes for high-interest, non-deductible consumer debt such as car loans, appliance loans, loans for your bass boat, department store and gas cards, and the like. Zeroing it out will save interest and free up cash flow from debt service to saving and investing. It’s like moving from defense to offense!

Next, try to maximize contributions to Self-Directed IRAs or Roth IRAs. If you want to explore holding IRA assets in non-traditional or alternative asset classes, such as real estate, gold and precious metals, tax liens and certificates, private lending, LLCs or partnerships, call American IRA, LLC at 866-7500-IRA (472).

As of 2019, if you meet certain income requirements, you can contribute up to $6,000 in any combination of traditional and Roth IRAs. If you are age 50 or older, you can contribute an additional $1,000, for a total of $7,000 per year. And if you are married, you can double up, using a Spousal IRA.

Once that’s done, go back and maximize your 401(k) or SIMPLE IRA contributions within your employer’s plan, or open up your own SEP (Simplified employee pension) or Solo 401(k) plan to handle self-employed income or income from your own owner-operated corporation.

Whatever you do, do it with a sense of urgency. You may think you will be working well past age 65, which helps. But many people simply don’t have that option. Business-cycle-related layoffs, restructuring, an increasingly out-of-date skill set and medical problems mean most people are forced out of the work force involuntarily.  

So, if you are among those with little or nothing put away for retirement – at any age, it’s time to take decisive action.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

What is Compounding and How Can It Work for You in a Self-Directed IRA?

There’s a good chance you have heard the term “compound interest.” You might even understand what it means, but you would be in the minority if you do. According to a survey conducted by ValuePenguin, which helps consumers with financial decisions, 69 percent of Americans do not fully comprehend it.

Compounding is such a critical part of saving and investing, whether it’s inside or outside a Self-Directed IRA. It makes your money grow at a faster rate than simple interest because you not only earn interest on the funds you invested but you also eventually start earning interest on the interest that your original investment earned.

Financial experts call this process “exponential growth,” but all that the rest of us need to know is that as long as we are reinvesting our interest from savings or investments, the interest we earn will also earn returns on top of those received on the original principle. That’s the power of compounding, and it will work its magic on your Self-Directed IRA and 401(k) to help it grow over the years.

An example of compounding

Let’s assume you have $10,000 in an investment that’s growing at 8% annually.  After the first year, your investment will be worth $10,800.  In year two, the 8% growth is on the $10,800. So, instead of earning $800, you would make $864, and your entire balance would have grown to $11,664 after two years—all without you adding any more money to the account. And each year your account will grow faster.

Investments do not grow at a consistent rate, however. Some years they might produce at two percent or less, while other years will be 15 percent or more. Either way, compounding continues.

Compounding’s effect on your retirement plan

Self-Directed IRAs, whether traditional or Roth, provide perfect illustrations for compounding. Since retirement investors are in for the long haul, their accounts are earning interest, dividends, and capital gains, all of which become part of the compounding process. The primary difference in these plans’ centers on taxes.

Retirement investors with traditional plans fund their accounts with pre-tax money. Once they make their contributions, the funds grow tax-deferred, and taxes are not due until withdrawals begin during retirement. Roth plans, on the other hand, are funded with after-tax money, and withdrawals at retirement are tax-free.

Because of this difference, those with Roth accounts must come up with more money to fund their accounts to the maximum allowed ($6,000 in 2019). Since the taxes are taken out up front, you will have to come up with that money.

For example, if you want to contribute $230 from your bi-weekly check and you are paying 20 percent in taxes ($46), you will need to come up with that extra $46 for your Roth. The good news: Your Roth will compound tax-free over the years, and you will be able to withdraw it at retirement without paying taxes on the original contribution or the money that was earned through compounding.

Retirement plans vs. personal savings

It’s quite shocking to see the difference that investing within a retirement plan can make in the amount you accumulate. Here’s a comparison of two 25-year-olds who begin investing the same amount at the same time. Investor “A” will be using a Self-Directed IRA while Investor “B” will be using personal funds.

Each of these individuals will contribute $2,000 each year and continue until they reach the age of 70.  By the end, they will each have contributed $90,000 over those 45 years and will have earned 10 percent annually. Investor “A” will have amassed $1,581,590 in the Self-Directed IRA account, while Investor “B” will have accrued $713,983 in personal funds—less than half of “A’s” total!

How is that possible? Both investors had the benefit of compounding, but “B” paid taxes on his earnings every year, and “A” had the bonus of tax-deferred compounding. Compounding that is coupled with the tax advantages of a retirement account is impossible to beat. Investors who avail themselves of these two benefits will almost certainly eliminate the possibility of having financial regrets in their later years.

Invest early and often

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Give Your Self-Directed IRA Retirement Savings a Boost

There is good news for retirement savers in 2019: The IRS has increased the maximum Self-Directed IRA contribution from $5,500 to $6,000, and if you are 50 years of age or over, you can add a $1,000 catch-up contribution for a total of $7,000.

There is one important stipulation, however. You must have earned income of at least the amount you wish to contribute. In other words, if your earned income for 2019 turns out to be $5,000, that’s all you may add to your Self-Directed IRA, even though the maximum limit is $6,000. And “earned income” means just that. You cannot include passive income such as social security, interest, or capital gains.

So how does someone without earned income set aside money for retirement?

The Spousal IRA might be the answer

A Spousal IRA can be either a Traditional IRA or Roth IRA registered in the name of a non-working spouse. The working spouse can contribute to his or her own Self-Directed IRA and the Spousal IRA, giving them both an opportunity to save for retirement even though only one of them has earned income. A Spousal IRA is an excellent way to boost the couple’s total retirement savings.

There are rules for Spousal IRAs

To qualify for a Spousal IRA, you must be married and file your taxes jointly. The working spouse’s income must be at least equal to the contribution to the Spousal IRA. If the contributing spouse also has a Self-Directed IRA, the taxable income must be at least equal to the total contributions to both IRAs.

If you decide to use a Traditional IRA, you will make contributions that you may deduct at tax time. You will pay income tax on those distributions at retirement and also be subjected to Required Minimum Distributions (RMD) when you reach 70 ½ years of age.

If you choose a Roth IRA, you will make your contributions after taxes, so there are no RMDs or taxes owed on distributions. If you are a working spouse, you have the option to use one type of Self-Directed IRA, while your non-working spouse uses the other.

If you cannot have a Solo 401(k), use a SEP IRA

A Solo 401(k) plan covers one employee, so if you are self-employed or a small business owner with no full-time employees, these plans are perfect. The problem is that they must have been established by December 31st of last year so you can make contributions for this year.

If you cannot take advantage of this popular plan this year, consider using a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) instead. A SEP IRA is a profit sharing plan that allows an employer to make up to a 25% profit sharing contribution to all eligible employees up to a maximum of $56,000 for 2019. In cases of a single-member LLC or sole proprietorship, the employer can contribute up to 20%. And, unlike the Solo 401(k), you can open and contribute to a SEP IRA for last year any time before April 15th.

Boost your retirement savings with an HSA

Anyone covered by a High Deductible Health Plan (HDHP), is allowed to set aside funds, up to the contribution limit, to pay for qualified out-of-pocket medical expenses.

Health Savings Accounts have several advantages:

  • Contributions to an HSA are 100% deductible (up to the legal limit) –just like a Self-Directed IRA.
  • Withdrawals used to pay qualified medical expenses–including dental and vision–are not taxed.
  • Interest earnings accumulate tax-deferred, but if you use them to pay qualified medical expenses, they are tax-free.
  • Any unused money in your HSA account is not forfeited at the end of the year but is carried forward and continues to grow tax-deferred.
  • HSAs can be invested in mutual funds, stocks, and other investment tools to generate even more money.

The maximum 2019 contribution is $3,500 for individuals and $7,000 for families. There is a $1,000 catch-up for individuals over the age of 55.

Talk to the professionals for other ways to boost your retirement savings

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

The Process of Investing in Real Estate with a Self-Directed IRA

Most IRA owners are still investing in stocks, bonds, and mutual funds because insurance companies, banks, and brokerages typically control the type of investments that may be used. But a growing number of investors are choosing to be independent of the limited choices being offered by these firms. They are taking a different route by using a Self-Directed IRA.

Self-Directed IRAs are legally structured just like a traditional or Roth IRA. The annual contribution limits and tax advantages are identical, but the choices of investments are greatly expanded. While common stocks, bonds, and mutual funds are still available through Self-Directed IRAs, the addition of private stocks, tax liens, precious metals, joint ventures, private notes, and real estate add diversity and control into retirement investing.

Real estate appeals to a wide variety of investors

As the name suggests, real estate is tangible. It is more predictable than many of the traditional investments, and it can be passed down through multiple generations. In other words, it can be a key ingredient in anyone’s retirement portfolio.

As mentioned, diversity and control are the two overriding factors that steer many investors toward a Self-Directed IRA in real estate. Confidence in Wall Street and money managers has waned over the years, and investors are becoming aware that there are so many avenues for researching alternative investments, such as real estate, which gives them the confidence to direct their funds and have the potential for higher returns.

Purchasing real estate with your Self-Directed IRA is not difficult

Here’s how it works:

  • After you open your Self-Directed IRA, you will also open a checking account that’s associated with your IRA. The checking account, set up at your bank, will be the platform through which you purchase and manage your investment properties.
  • After you have completed the necessary research and are ready to buy a property, you write a check from the dedicated account.
  • All deposits, such as rent checks and the proceeds from any sales, are made into the checking account. Conversely, any expenses–mortgage payments, real taxes, improvements, utility bills, repairs, etc.—are paid from the same account.

Keep in mind that Your IRA owns the property. You manage it on behalf of your IRA, but every transaction must go through your IRA checking account.

Follow the rules for Self-Directed IRAs in real estate

While there are no restrictions on the type of real estate your Self-Directed IRA may purchase, there are rules that govern the ownership and servicing of the property. Failure to abide by them could have your entire account deemed a full distribution with taxes and penalties.

Here are the rules:

  • Your Self-Directed IRA may not purchase a property that you already own. Similarly, you are not allowed to buy a property that your IRA owns.
  • You may not live in, or vacation in, any property that your IRA owns.
  • You may not hire a business owned by a disqualified person to provide a service to your IRA-owned property. In other words, if your IRA owns a rental property, you may not hire your father’s roofing company to replace the roof.
  • You are not allowed to receive a salary for managing the property. You may, however, perform managerial services without charging your IRA.
  • You may not perform physical work to the property that your IRA owns.

Due diligence is the key to successful real estate investing

The first step into real estate investing should be to research the market, which includes demographics, income, and job growth. If you are hiring someone to manage the real estate, make a thorough inquiry into that individual. And also research the custodian who will be handling your transactions.

Do you have questions about using a Self-Directed IRA to buy real estate?

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed IRA Transfers and Rollovers are not the Same Things

Sometimes it’s annoying when people dwell on semantics. Other times it’s important to understand the differences between certain words or terms. For instance, take the words “transfers” and “rollovers” as they pertain to retirement accounts. You often hear them used interchangeably, but they have distinctly different meanings.

These differences matter a great deal to the IRS, and if you do not understand them, it could have a substantial impact on your taxes. If you are trying to move your current retirement savings into a Self-Directed IRA and are unsure of how to proceed, here are the details:

Transfers are fairly simple

Transfers are the basic method of moving your Self-Directed IRA from one firm to another. The funds move directly from one IRA to another, and the IRA owner never sees the money. Transfers are not reported to the IRS, and there are no limits on the number of times you can transfer your account.

When transferring Self-Directed IRAs, however, your account must be going into the same type of account. For example, if you are moving a Traditional IRA into a Self-Directed IRA, it cannot be a Self-Directed Roth IRA. Remember, \Traditional IRA transfers into another Traditional IRA and Roth into Roth.

There are two types of rollovers

Direct rollover:  When someone moves funds from a qualified retirement plan other than an IRA—their employer’s 401(k), for instance—into a Traditional IRA, the funds are sent directly from one provider to another. As with a transfer, you will not see the money until it shows up in your new account. The difference from a transfer is that the IRS is notified of the transaction. But not to worry, there is no tax due on the rollover funds since you are “rolling” them into another retirement account.

Indirect rollover: This is the type of rollover that has the potential to cause trouble. Also known as a 60-day rollover, you get to take possession of your money personally before depositing it into an IRA within a 60-day window. In other words, you take the money, deposit it into your checking account, and then write a check for the same amount and add it to your Self-Directed IRA.

The trouble comes if you fail to re-deposit the money in the 60-day time frame and the IRS taxes the entire amount. Also, the IRS allows only one indirect rollover within 12 months regardless of how many accounts you have.

Transferring your retirement account is a low-hassle process

Make sure your old account is compatible with the new one, and the entire process will be a breeze. As mentioned above, you may only transfer a Traditional IRA into a new Traditional IRA account or a Roth IRA into another Roth. The firm into which you are transferring funds can provide you with the form to fill out and send to your current IRA provider. The funds will go directly from your current to your new Self-Directed IRA, and you can do as many as you want in one year.

One small caveat: You must rely on your old custodian to transfer the money on their timeline, so it can be a slower process.

Rollovers are perfect for moving a 401(k) from a former employer

Direct rollovers are ideal for removing funds from your company’s retirement plan and depositing it into your IRA. It’s quick and simple. All you need to do is open an IRA account, which can often be done online. Keep in mind; a Self-Directed IRA offers you many more investment options for your retirement funds.

Better yet, contact a professional

If you own a Self-Directed IRA or are looking to open one, it’s important to have an expert on IRA transactions on your side before you start the process of a transfer or rollover. Any mistakes could prove costly—the IRS can assess taxes and penalties—and you could put your entire IRA at risk.

American IRA, LLC specializes in serving the needs of owners of Self-Directed IRAs and other retirement accounts, and we will help to ensure that your transfers and transactions are executed properly and promptly, in compliance with IRS regulations and tax law.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

What if You Have an Excess Contribution in Your Self-Directed IRA?

A Self-Directed IRA is a wonderful tool for saving for a secure retirement, and anyone who does not take advantage of them by contributing up to the allowable limits ($6,000 in 2019, $7,000 if you are age 50 or over) is wasting an opportunity and leaving gaps in their retirement funding. It should be every retirement saver’s goal to meet these annual limits each year. But what happens when someone exceeds them? Is there any way to correct it?

Well, it happens so many times that the IRS has a name for it: it’s called an excess contribution. And yes, it can be corrected. Here are the details:

How do excess contributions happen?

It seems simple enough. You are allowed to contribute $5,500 to a traditional or Roth IRA for the 2018 tax year, so you write a check for no more than that amount and send it to your Self-Directed IRA custodian. What could go wrong?  Here are some of the ways people lose track:

  • You have exceeded the IRA limit through multiple accounts:The annual limit on IRA contributions is the combined total of traditional and Roth IRAs, not each IRA. Add up all of your IRAs, both traditional and Roth, to make sure you have not contributed too much.
  • You have got your Self-Directed IRA savings on autopilot: Also known as an automatic investment plan, you can have your monthly withdrawals taken from your checking account. If you have the amount set too high, you will go over the limit. For example, with the contribution limit at $6,000 for 2019, make sure your monthly investment does not exceed $500.
  • Your income is too high for a full Roth IRA contribution: Unlike Traditional IRAs, Roth IRAs have income limits to determine who qualifies. Contributions are reduced or phased out at higher income levels.
  • You have reached the age of 70 ½: Some people do not realize that contributions to a Traditional IRA are not allowed in and after the year they turn 70 ½. This rule does not apply to Roth IRAs or rollover contributions.

How do I fix things if I contribute too much?

If you have contributed too much to a Self-Directed IRA, it’s an easy fix if you do it before filing your taxes. Contact your IRA custodian and let them know you have an excess contribution. They will provide the appropriate paperwork.

Withdraw the excess contribution and any earnings from the Self-Directed IRA. Earnings are calculated through a formula called “net income attributable,” and they are taxable as ordinary income. You might need to contact a tax professional for help in calculating your earnings.

If you discovered your mistake after filing your taxes, you still have a few options:

Call your IRA custodian. If you remove the excess contribution and earnings and file an amended tax return by the October extension deadline, you can avoid a 6% penalty.

You may also carry the excess forward to the new tax year. For example, if you contributed $250 above the limit in 2018, you can count it toward your 2019 contribution. You will pay a 6% penalty while the excess contribution is on the books, but you will avoid any future penalties.

Another option, which is typically not recommended, is to do nothing and pay 6% on the excess every year. Some Self-Directed IRA holders reportedly over-contribute to their accounts intentionally, rationalizing that their investments will do better than the 6% penalty. But your accountant will likely warn you not to follow this risky path.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.